THE DCIT-AKOLA-CIRCLE, Akola V. SHRI DNYANDEO NINU PATIL, Akola

ITA 279/NAG/2014

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1713 (ITAT-NAGPUR)
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Department
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 21-05-2014
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KANE
• Assessee Lawyers: C J THAKAR AW SHRI S C THAKAR
• Keywords: Earning of tax free income; Source of fund
• Section: 10(14); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL NAGPUR BENCH, NAGPUR BEFORE SHRI MUKUL K. SHRAWAT, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER ITA NO. 279/NAG./2014 ( ASSESSMENT YEAR : 200910 ) DY. COMMISSIONER OF INCOME TAX AKOLA CIRCLE, AKOLA APPELLANT V/S SHRI DNYANDEO NINU PATIL C/O ELITE UDYOG, NR. RADHA KRISHNA CINEMA MURTIZAPUR ROAD, AKOLA 444 001 PAN AD[[[0651A .. RESPONDENT ASSESSEE BY : SHRI C.J. THAKAR A/W SHRI S.C. THAKAR REVENUE BY : SHRI NARENDRA KANE DATE OF HEARING 31.07.2015 DATE OF ORDER 28.08 .2015 O R D E R PER MUKUL K. SHRAWAT, J.M. THIS APPEAL FILED BY THE REVENUE IS EMANATING FROM THE IMPUGNED ORDER DATED 29 TH JANUARY 2014, PASSED BY THE LEARNED COMMISSIONER (APPEALS)-I, NAGPUR, FOR THE ASSESSMEN T YEAR 2009 10. 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THERE IS A DIRECT NEXUS M/S. B.K. INDUSTRIES 2 BETWEEN THE FUNDS BORROWED ON WHICH INTEREST WAS PA ID AND THE FUNDS INVESTED IN THE FIRM ON WHICH THERE INTER EST WAS RECEIVED, SUCH INTEREST HAS TO BE DEDUCTED UNDER SE CTION 36(1)(III) OF THE ACT AGAINST THE INTEREST INCOME W HEREAS THERE WAS NEITHER ANY INTEREST INCOME EARNED BY THE ASSES SEE ON THE CAPITAL INVESTED NOR THERE WAS ANY PROVISION OF PAYMENT OF INTEREST OR SALARY TO THE ASSESSEE IN THE PARTNERSH IP DEEDS OF THE FIRM IN WHICH ASSESSEE WAS A PARTNER. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS NOT APPRECIATED THAT IN PARA 6 OF CBDT CIRCULAR NO.5/2014, WHEREIN IT HAS BEEN CLEARL Y STATED THAT RULE 8D R.W.S. 14A OF THE ACT PROVIDES FOR DIS ALLOWANCE OF EXPENDITURE EVEN WHERE THE TAX PAYER IN A PARTICULA R YEAR HAS NOT EARNED ANY EXEMPT INCOME. 2. THE ASSESSEE, IN INDIVIDUAL CAPACITY, HAS FILED THE RETURN OF INCOME DECLARING INCOME OF ` 10,74,400, AND THE RESOURCES OF INCOME WERE STATED TO BE HOUSE PROPERTY INCOME, INTER EST INCOME AND PARTNERSHIP IN A FIRM. THE ASSESSING OFFICER HAS NOTICED THAT THE ASSESSEE HAD CLAIMED THE DEDUCTION OF INTEREST PAID TO IDBI BANK TO THE TUNE OF ` 1,21,25,488. FURTHER, IT WAS NOTICED BY THE ASSESSIN G OFFICER THAT THE ASSESSEE IS A PARTNER IN A FIRM M/S. DNV REALITY, PUNE. IT WAS ALSO NOTICED BY THE ASSESSING OFFICER THA T THE ASSESSEE IS A PARTNER IN M/S. ELITE PROMOTERS AND BUILDERS, PUN E. THE MAIN OBJECTION OF THE ASSESSING OFFICER WAS THAT, WHY THE INTEREST PAID TO IDBI BANK SHOULD NOT BE DISALLOWED BY INVOKING THE PR OVISIONS OF SECTION 14A OF THE ACT, AS THE PROFIT RECEIVED FROM T HE FIRM WAS NOT TAXABLE. THERE WAS AN OBSERVATION THAT NO PROFIT OR INTER EST WAS RECEIVED BY THE ASSESSEE FROM THOSE PARTNERSHIP FIRMS. ACCORDING TO THE ASSESSING OFFICER, THE PROFIT FROM THE PARTNERSHIP FIRM IS EXEMPT M/S. B.K. INDUSTRIES 3 UNDER SECTION 10(2A) OF THE ACT. IT WAS CONCLUDED B Y THE ASSESSING OFFICER THAT THE INTEREST EXPENDITURE WAS EARNED OUT OF TH E FUNDS WHICH WERE INVESTED IN EARNING THE INCOME AS SHARE P ROFIT FROM THOSE FIRMS WHICH WERE EXEMPT UNDER SECTION 10(2A) OF THE ACT, THEREFORE, THE INCOME WHICH IS NOT TAXABLE IN THE HANDS OF THE ASSE SSEE, HAS A NEXUS WITH THE INTEREST EXPENDITURE, HENCE, NOT TO BE ALL OWED AS PER THE PROVISIONS OF SECTION 14A OF THE ACT. RESULTANTLY, DUE TO THE DISALLOWANCE, AN ADDITION OF ` 1,21,25,488, WAS MADE. 3. WHEN THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY, IT WAS EXPLAINED THAT THE ASSESSEE HAD SOLD SOME AGRICULTURAL LAND ON 28 TH JANUARY 2008, AND HIS SHARE IN THE SALE PROCEEDS OF ` 16 CRORES, WAS DEPOSITED WITH IDBI BANK. OUT OF THE SAID DEPOSIT, THE ASSESSEE TOOK A LOAN OF ` 10,03,38,795, ON THE SAID FIXED DEPOSIT. AS PER THE FACTS STATED BEFORE THE LOW ER AUTHORITIES, THE ASSESSEE HAD BORROWED FUNDS AGAINST THE FIXED DEP OSIT OF IDBI BANK AND THOSE FUNDS BORROWED WERE INTRODUCED AS CAPI TAL IN A PARTNERSHIP FIRM NAMELY E&B REALITY, PUNE, AMOUNTING TO ` 2,64,00,000. THE ASSESSEE HAD ALSO DEPOSITED CAPITAL OF ` 6,83,50,000, IN AN ANOTHER FIRM NAMELY M/S. ELITE PR OMOTERS AND BUILDERS. FACTS OF THE CASE HAVE ALSO REVEALED THAT O N THE OTHER HAND, THE ASSESSEE HAS ALSO RECEIVED INTEREST ON FIXED DEPOSITS OF ` 1,29,69,114. THERE WAS ONE MORE UNDISPUTED FACT THAT DURING THE M/S. B.K. INDUSTRIES 4 FINANCIAL YEAR UNDER CONSIDERATION, NEITHER THE ASSES SEE HAD RECEIVED ANY INTEREST ON CAPITAL NOR RECEIVED ANY REMUNERATION FROM THE FIRM. EVEN THE ASSESSEE HAS NOT RECEIVED HIS SHARE OF PROF IT FROM THOSE PARTNERSHIP FIRMS. THE ASSESSEE HAS CLAIMED THE DEDU CTION OF INTEREST UNDER THE HEAD INCOME FROM OTHER SOURCES . AN ARGUMENT BEFORE THE LEARNED CIT(A) WAS THAT THE APPELLANT HAS ACTUALLY NOT RECEIVED ANY EXEMPT INCOME FROM THE SAID TWO FIRMS. IN A SITUATION WHERE NO INCOME WAS RECEIVE, THEN THERE WAS NO QUES TION OF INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. REL IANCE WAS PLACED ON A DECISION OF THE TRIBUNAL, MUMBAI BENCH, IN YATISH TRADING CO. PVT. LTD. V/S ACIT, [2011] 50 DTR 158 (MU M.). A LEGAL OPINION WAS EXPRESSED THAT THERE MUST BE SOME DOMINAN T AND IMMEDIATE CONNECTION OR NEXUS WITH THE EXPENDITURE INC URRED AND THE INCOME NOT FORMING PART OF THE TOTAL INCOME. IF T HERE IS NO ACTUAL RECEIPT OF INCOME, THEN THERE IS NO BASIS FOR DISALLO WANCE OF EXPENDITURE. ANOTHER DECISION OF THE TRIBUNAL, MUMBAI BENCH, IN ACIT V/S DELITE ENTERPRISES, 50 DTR 193 (MUM.), HAS A LSO BEEN CITED BEFORE THE LEARNED CIT(A). THE LEARNED CIT(A) HELD THAT THE ADMITTED FACTUAL POSITION WAS THAT NO EXEMPT INCOME WAS EARNED BY THE ASSESSEE, THEREFORE, THERE WAS NO EXEMPTION CLAIMED BY THE ASSESSEE UNDER SECTION 10(2A) OF THE ACT. THE ARGUME NT OF THE M/S. B.K. INDUSTRIES 5 ASSESSEE WAS ACCEPTED AND THE ASSESSING OFFICER WAS DIRECTED TO DELETE THE ADDITION AS FOLLOWS:- 8.3 IT IS THUS SEEN THAT THERE IS NO EXEMPTION CLAI MED UNDER SECTION 10(2A) OF THE ACT BY THE APPELLANT. SECTION 10(14) CLEARLY STATES THAT EXPENDITURE INCURRED BY THE ASS ESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME UNDER THE ACT WILL NOT BE ALLOWED. HOWEVER, IN THIS CASE, THERE IS NO INCOME EARNED BY THE ASSESSEE WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THEREFORE, THE C LAIM OF THE APPELLANT IS ALLOWABLE UNDER SECTION 36(1)(III) OF THE ACT. NO PART OF INTEREST EXPENDITURE WHICH IS SOUGHT TO BE DISALLOWED UNDER SECTION 14A, RELATES TO SHARE IN PROFITS OF P ARTNERSHIP FIRM WHICH IS OTHERWISE EXEMPT UNDER SECTION 10(2A). AS THERE IS A DIRECT NEXUS BETWEEN THE FUNDS BORROWED ON WHICH IN TEREST IS PAID AND THE FUNDS INVESTED IN THE FIRM ON WHICH IN TEREST IS RECEIVED, TO MY CONSIDERED OPINION, SUCH INTEREST H AS TO BE DEDUCTED UNDER SECTION 36(1)(III) AGAINST THE INTER EST INCOME. THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COU RT IN THE CASE OF DELITE ENTERPRISES PVT. LTD., IS SQUARELY APPLIC ABLE TO THE FACTS OF THE PRESENT CASE AND THERE BEING NO CONTRARY DEC ISION OF THE JURISDICTIONAL HIGH COURT, THE CLAIM OF THE APPELLA NT IS ALLOWED. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF I NTEREST OF ` 1,22,25,488, IS DIRECTED TO BE DELETED. HENCE, THIS GROUND IS ALLOWED. 4. WITH THESE FACTUAL BACKGROUNDS, WE HAVE HEARD BOTH TH E SIDES AT SOME LENGTH. FROM THE SIDE OF THE REVENUE, THE LEAR NED DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE VEHEMENTL Y ON THE CIRCULAR OF THE CBDT, BEARING NO.5/2014 [F.NO.225/18 2/2013ITA.II, DATED 11 TH FEBRUARY 2014. AS PER THIS CIRCULAR, VIDE CLAUSE-6, THE CBDT HAS DIRECTED AS UNDER:- 6. THUS IN LIGHT OF ABOVE, CENTRAL BOARD OF DIRECT T AXES, IN EXERCISE OF ITS POWERS UNDER SECTION 119 OF THE ACT , HEREBY CLARIFIES THAT RULE 8D READ WITH SECTION 14A O F THE M/S. B.K. INDUSTRIES 6 ACT PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE TAXPAYER IN A PARTICULAR YEAR HAS NOT EARNED AN Y EXEMPT INCOME. 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO PLAC ED RELIANCE ON THE DECISION OF THE TRIBUNAL IN MRS. VA RSHA R. TAURANI, 40 TAXMAN.COM 517 (MUM.), MAHALAXMI LIQUOR PROMOTERS P VT. LTD., 29 TAXMAN.COM 70 (HYD.) AND D.J. MEHTA V/S ITO, 104 IT D 527 (MUM.). 6. ON THE OTHER HAND, FROM THE SIDE OF THE RESPONDENT-AS SESSEE, THE LEARNED COUNSEL FOR THE ASSESSEE HAS PLACED STRONG RELIANCE ON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT PRONOUNCED IN THE CASE OF CIT V/S DELITE ENTERPRISES (TAX APPEAL N O.110 OF 2009), ORDER DATED 26 TH FEBRUARY 2009. THE LEARNED COUNSEL HAS ALSO PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL, MUMBAI BENC H, PRONOUNCED IN THE CASE OF AVSHESH MERCANTILE PVT. LTD., ITA NO.5 779/MUM./ 2006) FOR THE ASSESSMENT YEAR 2003-04 AND ITA NO.208 /MUM./2009 AND OTHER GROUP OF CASES, VIDE ORDER DATED 15 TH MARCH 2012. FEW OTHER DECISIONS HAVE ALSO BEEN CITED AS LISTED BELOW: - I) ORDER OF HONBLE GUJARAT HIGH COURT IN TAX APPEAL NO.239 OF 2014, DATED 24 TH MARCH 2014; II) ORDER OF HONBLE PUNJAB & HARYANA HIGH COURT IN ITA NO.970 OF 2008, DATE 2 ND APRIL 2014, CIT V/S M/S. LAKHANI MARKETING IND. M/S. B.K. INDUSTRIES 7 III) ORDER OF THE TRIBUNAL, CHENNAI BENCH, ITA NO.1717/MDS./ 2013, ORDER DATED 31 ST JUNE 2014, ACIT V/S MR. M. BASKARAN. 7. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH IN THE LIGH T OF THE ORDERS OF THE REVENUE AUTHORITIES AND THE COMPILATIONS FILED FROM BOTH THE SIDES. ALTHOUGH THE LEARNED DEPARTMENTAL REPR ESENTATIVE HAS PLACED BEFORE US A COPY OF CIRCULAR DATED 11 TH FEBRUARY 2014, FOR THE LEGAL PROPOSITION THAT EVEN WHERE TAX PAYER HAS NOT EARNED ANY EXEMPT INCOME, THEN THE PROVISIONS OF SECTION 14A R/W RULE 8D ARE TO BE APPLIED. HOWEVER, FEW DECISIONS OF THE TRIBUNAL A ND THE ORDER OF THE HON'BLE JURISDICTIONAL HIGH COURT ARE IN DIRECT C ONTRADICTION OF THE CBDT CIRCULAR. THE QUESTION BEFORE THE HONBLE HIGH COURT IN DELITE ENTERPRISES (SUPRA) WAS THAT IF THERE IS NO EXEMPT IN COME THEN WHETHER THE PROVISIONS OF SECTION 14A COULD BE APPLI ED AND IN AN ANSWER TO THE SAID QUESTION, IT WAS HELD THAT ON FACTS WE FIND THAT THERE IS NO PROFIT FOR THE RELEVANT ASSESSMENT YEAR. HENCE, THE QUESTION AS FRAMED WOULD NOT ARISE. SO A VIEW WAS EXPRESSED THAT IF THERE IS NO INCOME EARNED BY THE ASSESSEE WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, THEN UNDER THOSE CI RCUMSTANCES, THE PROVISIONS OF SECTION 14A ARE NOT REQUIRED TO BE IN VOKED. IN A GROUP OF CASES, THE TRIBUNAL, MUMBAI BENCH, IN AVSH ESH MERCANTILE (SUPRA, HAS HELD THAT EVEN IF THERE WAS NO INCOME EAR NED DURING THE M/S. B.K. INDUSTRIES 8 YEAR WHICH WAS SAID TO BE AN EXEMPT INCOME, THE EXPE NDITURE INCURRED ON INTEREST IS NOT LIABLE TO BE DISALLOWED UNDER SECTION 14A OF THE ACT. ALL THE DECISION CITED FROM THE SIDE OF T HE ASSESSEE ARE IN SUPPORT OF THIS VIEW. OTHERWISE ALSO, WHILE SITING U NDER THE JURISDICTION OF HON'BLE JURISDICTIONAL HIGH COURT, W E ARE EXPECTED TO DUTIFULLY FOLLOW THE SAID JUDGMENT. AS FAR AS THIS CASE IS CONCERNED, SINCE THE UNDISPUTED FACT WAS THAT THERE WAS NO EARNI NG OF EXEMPT INCOME, THEN THE NATURAL CONSEQUENCE IS THAT THE PROVIS ION OF SECTION 14A NEED NOT BE INVOKED. THE CBDT CIRCULAR IS NOT BI NDING UPON US SINCE WE ARE FOLLOWING THE DECISION OF THE HONBLE HI GH COURT. 8. THE ALTERNATIVE PLEA OF THE ASSESSEE IS EFFECTIVE IN THIS CASE THAT THE FIRST STEP ON THE PART OF THE ASSESSING OFFICER WAS TO COMPUTE THE INCOME UNDER THE HEAD INCOME FROM OTHER SOURCE. THE ASSESSEE HAS NOT CLAIMED ANY REBATE OF EXPENDITU RE AGAINST THE EXEMPT INCOME. THE ASSESSEES CLAIM AS PER THE COMP UTATION WAS VERY SIMPLE THAT ON ONE HAND INTEREST FROM THE BANK ON FDR WAS RECEIVED AND SIDE BY SIDE, THE INTEREST PAID TO THE B ANK ON LOAN AGAINST FD WAS CLAIMED. THEREFORE, THE ASSESSEES S IMPLE CLAIM WAS THAT THE INTEREST EARNED FROM BANK WAS REQUIRED TO BE R EDUCED FROM THE INTEREST PAID TO THE BANK. THIS SIMPLE LOGIC OF TH E ASSESSEE IS ALSO CONVINCING, HENCE, ACCEPTING BOTH THE REASONS AD VANCED IN SUPPORT OF THE ORDER OF THE LEARNED CIT(A); APPEARS TO BE LEGALLY M/S. B.K. INDUSTRIES 9 CORRECT, HENCE, WE HEREBY AFFIRM THE FINDINGS OF THE LEARNED CIT(A). ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DIS MISSED. 9. IN THE RESULT, REVENUES APPEAL STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.08.2015 SD/ - SHAMIM YAHYA ACCOUNTANT MEMBER SD/ - MUKUL K. SHRAWAT JUDICIAL MEMBER NAGPUR, DATED: 28.08.2015 COPY OF THE ORDER FORWARDED TO : (1) THE ASSESSEE; (2) THE REVENUE; (3) THE CIT(A); (4) THE CIT, NAGPUR CITY CONCERNED; (5) THE DR, ITAT, NAGPUR; (6) GUARD FILE. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY A SSISTANT REGISTRAR ITAT, NAGPUR